How Do You Manage Risk With Time?

by Apr 1, 2019Newsletters

By Aaron CFP®, Managing Director

 

“Successful investing is about managing risk, not avoiding it.”

-Benjamin Graham

There are many ways to manage risk.  One way is with time.

Take a look at the green bars in this chart, representing the range of investment returns for U.S. stocks from 1950 through 2018 (as represented by the S&P 500 Shiller Composite).   On the left side of the chart we see that since 1950 the worst one-year performance for U.S. stocks was a loss of -39% and the best year for stocks was a positive return of 47%.   That is a dramatic range.

Now consider the 5-year rolling period.  Notice how the range narrows significantly from -3% to 28% and how the risk of loss is significantly lower than any one-year period.  If you invested in the worst 5-year period for stocks since 1950 your loss would only be -3%.

When we look at the 10-year and 20-year rolling periods, the range of returns continues to narrow.  From 1950 through today, a period of time that included several major market disruptions (the 1973 oil embargo, Black Friday, the tech bubble, and the Great Recession, to name a few), the worst 10-year period for the U.S. stock market resulted in a loss of just -1%. The worst 20-year period since 1950 resulted in a positive return of 6%.

What we learn from the data is that time is an important consideration when we consider investment risk.  If you plan to invest for a short period of time your risk of losing money by investing in stocks is significantly higher than if you have a longer time horizon.  Structuring your investments with time in mind may help mitigate risk.  Is it worth the risk to invest money in the stock market if you need that money in the next 12 months?  Probably not.  But what if you are investing money that you don’t need for 10 or 20 years- is it worth the risk of investing that money in the stock market?  It may be.

Talk to your Spotlight wealth manager about structuring your investment portfolio around your time horizon.  Don’t avoid risk; use risk management strategies instead.

Aaron Kirsch CFP®, Managing Director

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How Do You Manage Risk With Time?

by Apr 1, 2019Newsletters

By Aaron CFP®, Managing Director

 

“Successful investing is about managing risk, not avoiding it.”

-Benjamin Graham

There are many ways to manage risk.  One way is with time.

Take a look at the green bars in this chart, representing the range of investment returns for U.S. stocks from 1950 through 2018 (as represented by the S&P 500 Shiller Composite).   On the left side of the chart we see that since 1950 the worst one-year performance for U.S. stocks was a loss of -39% and the best year for stocks was a positive return of 47%.   That is a dramatic range.

Now consider the 5-year rolling period.  Notice how the range narrows significantly from -3% to 28% and how the risk of loss is significantly lower than any one-year period.  If you invested in the worst 5-year period for stocks since 1950 your loss would only be -3%.

When we look at the 10-year and 20-year rolling periods, the range of returns continues to narrow.  From 1950 through today, a period of time that included several major market disruptions (the 1973 oil embargo, Black Friday, the tech bubble, and the Great Recession, to name a few), the worst 10-year period for the U.S. stock market resulted in a loss of just -1%. The worst 20-year period since 1950 resulted in a positive return of 6%.

What we learn from the data is that time is an important consideration when we consider investment risk.  If you plan to invest for a short period of time your risk of losing money by investing in stocks is significantly higher than if you have a longer time horizon.  Structuring your investments with time in mind may help mitigate risk.  Is it worth the risk to invest money in the stock market if you need that money in the next 12 months?  Probably not.  But what if you are investing money that you don’t need for 10 or 20 years- is it worth the risk of investing that money in the stock market?  It may be.

Talk to your Spotlight wealth manager about structuring your investment portfolio around your time horizon.  Don’t avoid risk; use risk management strategies instead.

Aaron Kirsch CFP®, Managing Director